SP 500 and NDX Futures Daily Charts

This felt like a 'drift higher' day more than anything else.

The VIX fell.

Watch for a possible SP downgrade of Eurozone debt next week.

MF Global: The Issue Is Fraud and the Cover Up

Janet Tavakoli does her usual great job of cutting to the heart of the matter. Below is an excerpt of her Huffington Post piece on MF Global today.

I keep thinking that nothing will shock me anymore in this US financial fraud fest. But the coverup of the MF Global stealing of customer money in a cloud of legal doubletalk, supposedly the one pristine and untouchable principle on Wall Street, is almost too much.

I suspect that this media and legal spin machine referenced in Tavakoli's analysis is as much a coverup of the recipients of the customer money at the banks, and similar brokerage and banking schemes operating out of the City of London, as it is the actual misdeeds of the Corzine crowd. 

Fraus est celare fraudem

And as sacred as a former US Senator may be,  if one of the TBTF Banks is involved as the circumstances seem to indicate, this is the holy of holies in the Pax Americana.

I have heard speculation that this practice of misusing and leveraging customer funds is so widespread that an immediate cessation would cause a sharp contraction in the 'shadow banking system.'

It is NEVER permissible to take customer money and use it for your own purposes and proprietary trading, exposing it to risk of loss. The idea behind this latest scheme evolved from the use of funds in margin accounts in order to generate a safe return for the loan risk taken by the broker.  Give these jokers an inch and they will take your shirt. 

This gambling with customer money is a distortion of the principle of hypothecation and the US regulators need to shut this rathole down immediately through enforcement of the law.  Greed must be tempered by fear, if not by shame and the impulse to honesty.

And the regulators may wish to consider that when they continually turn a blind eye to glaring instances of market manipulation they foster a climate of lawlessness that opens the door for widespread fraud amongst normally law abiding participants.  It becomes a competition in larceny and a moveable feast of fraud.

“Poverty wants, but greed wants everything, and more.”

Customers run for safety, from one place to another, not sure what or whom they can trust.  One thing they may do is to stop trading on margin, and shut down their margin accounts, going to strictly cash investing wherever possible. And for your long term investments, you can take possession of the physical shares and keep them in a safer place than an account statement from any of the TBTF banks and hyper-hypothecating commodity brokers.

This will be a good test for the floundering Obama Administration, as he changes his tune to try and reverse his slide in the polls in an election year, and for the Republican opposition party, which cares nothing for the consumer and average investor with less than a million in yearly income. Let's see what they do, not what they say. Maybe it is time for a third party President.

The real risk here is that the greed and coverup of these fraud is going to scare the customers away from US markets, and bring them back to the days of the 1970s in which the small speculator, sick of being abused and cheated, stayed away from the financial markets in droves.

Perhaps they can start giving origami lessons in the pits, for those dull moments between the open and the close.

Jon Corzine Dodges the Fraud Question
By Janet Tavakoli
12/9/11 07:56 AM ET

It's as if Jon Corzine's PR machine is in top spin mode. You'll recall Jon Corzine is the former head of Goldman Sachs and former CEO of MF Global that appeared in front of Congress yesterday to answer questions about an estimated $600 million to $1.2 billion in missing money from the segregated accounts of customers of MF Global.

Yesterday and today, I heard confusion about whether or not MF Global's diverting customer funds was allowable and the possibility that customers will eventually get the money back.

Let me be clear. The diverting of customer funds from segregated accounts is not legal or allowable, and even if the money is later "found" it is fraud...

"Finding" Money Doesn't Excuse Fraud
Let me address the implication of the potential to "find" the money. The money may indeed be "found." If the bonds mature and pay off one hundred cents on the dollar, it may be possible to claw back money from MF Global's trading partners without much of a fight. Otherwise there may be a legal battle for money that as creditors of MF Global, they were never entitled to in the first place.

The rights of MF Global's customers are superior to the claims of these creditors. But eventually replacing the filched funds is not the same as restitution, since reputations and businesses have already been ruined. Damage has also been done to the trust in the global futures market and Futures Commission Merchants (FCMS).

Never Allowable to Filch Customers' Funds
The key issue is that it is never allowable to divert money from customers' segregated accounts. CFTC Commissioner Jill E. Sommers did a good job of stating that in her testimony yesterday. Moreover, if any trades mimicking Corzine's were done on behalf of the tiny minority of customer accounts that could engage in this trade, the trades would have to be segregated and credits or losses would show up in the relevant customers' accounts.

That still doesn't explain the missing funds in most customer accounts. Most customer accounts would not even be eligible for the "Corzine sovereign bond trade." Why is that? Here's an excerpt from Sommers' testimony: "Under Section 4d of the CEA, customer segregated funds may be invested in: general obligations of a sovereign nation (to the extent the FCM holds customer funds denominated in that sovereign nation's currency)." Most MF Global customers now missing money did not hold foreign currency accounts.

Pushing the idea that this trade was "allowable" for some customer is a distraction trick to avoid the question of whether MF Global impermissibly wired money from customers' accounts to satisfy margin calls for its own trades. Wire fraud is a federal crime.

At Issue is Massive Fraud
The issue under investigation is what appears to be a bold and massive fraud, and Jon Corzine offered no alternative explanation, in fact it seems he cannot explain anything about the firm he ran to anyone's satisfaction.

Jon Corzine may not know where the money is right now, but as head of MF Global, he knew or should have known his trades needed collateral and that customers' money went missing to satisfy part of that need. If it is proved that fraud occurred -- and money missing this long is a very suspicious sign -- it's not plausible to me that Jon Corzine was unaware it was happening at MF Global.

It seems Jon Corzine would have Congress believe he's hopelessly incompetent, because it is better to have them believe that than the business for which he was responsible was breathtakingly wrong.

Read the rest of Jon Corzine Dodges the Fraud Question.

Not a Clue: What Happened to the MF Global Customers' $1.2 Billion?

Jon Corzine said today that he does not know what happened to the missing $1.2 billion in customers' money.

If the CEO does not know, and if the regulators do not yet know, how can we possibly know?

But it's fun to take a guess. Here is mine.

The Truth is out there.

Gold Daily and Silver Weekly Charts

Gold is cheap relative to the idea that you could have a life’s fortune on a statement from a clearing agent and then find out that you don’t have a penny left anywhere. Which should you have had, physical gold or that clearing house statement? Gold is cheap because of the condition of other things.

Jim Sinclair

There was a very obvious drop in gold today. It was coincident with a decline in the SP futures, but was much sharper and more severe. I include the intra-day chart.  It has every indication of a major bear raid.

There was a quite a bit of disappointment today when the ECB cut rates 25 bp rather than 50 bp, and Mario Draghi did not pledge his central bank to endless quantitative easing and the buying of European bonds.

There was a report today at Zerohedge from Goldcore that the German business wire MNI reported that "MARKET SOURCES REPORT BIS, BOE & FEDERAL RESERVE WERE SELLING GOLD AFTER IT POPPED TO SESSION HIGH AT GMT 1335 -MNI NEWS via BLOOMBERG."

I get the daily report from Goldcore and I have a non-premium subscription at MNI. I have not been able to find the particulars of this, or any details, so I am unable to further comment. It is not that I doubt this, but I would like to know what causes them to say this with such specificity.  How did they know who was selling,  and what were their sources?  

Tomorrow will be interesting. In the afternoon a report/rumour swept the markets that Germany would not be supporting the new EU Treaty to resolve the debt crisis, and the equity markets went out on the lows.

Jon Corzine was testifying today before the House, but the more enlightening testimony may have been by CFTC Commissioner Jill Sommers who made it quite clear that the customers of MF Global have a claim on its assets that is superior to the creditors including JP Morgan.

As John F. Kennedy once said, "My father always said that all businessmen were sons-of-bitches, but I never really believed it until now."

This affaire d'MF will give us some insight into the character of the American government. It might be advisable to have a bag nearby however, because the experience may be truly nauseating.

At the end of last year I promised you a 'year of revelations.' And it seems that they are well underway. But the greatest revelations are not about what those in charge have been doing, but rather about ourselves and how we react to them.

I am thinking about what next year will bring. But I think the time is already here in which to take steps to protect your assets.

SP 500 and NDX Futures Daily Charts - Ugly Selloff Into the Close

The US equity long only fund managers would dearly like to rally this market to ensure their year end bonuses.

And once again they made a play to take the markets off their lows this afternoon, until another report (rumour) swept the market that Germany would not back any new treaty proposal tomorrow.

And so the markets sold off and went out very near their lows.

Texas Instruments lowered guidance after the bell, and the stock is being hammered after hours.

Based on my own industry knowledge the retail electronics industry is becoming desperate to move inventory in the States with a few notable exceptions especially amongst the wireless and personal device cult manufacturers.

CFTC Issues A Clear Statement: MF Global Customers Have Priority In This Bankruptcy

"A good parson once said that where mystery begins, religion ends. Cannot I say, as truly at least,
of human laws, that where mystery begins, justice ends?"

Edmund Burke

Jill Sommers, the CFTC Commissioner who is leading the investigation into the MF Global bankruptcy gave some important testimony to the House today that has been overshadowed by the expected appearance of Jon Corzine.

If you have been following the case, you know that JP Morgan has taken the lead in attempting to file motions to subordinate the customer accounts to their own debts. There is also a motion being heard that the Trustee has a conflict of interest with their fiduciary responsibilities as Trustee and a long standing relationship with JPM.

There are also some confusing arguments being made that because some of the activity was conducted in a subsidiary in London, the UK rules apply to the customer funds. Some of them sound like they are being crafted by the Wall Street attorneys who will be defending and justifying the theft of customer funds. Be careful of some of the 'news' that you get from the corporate media.

As Sommers later made clear, and as Janet Tavakoli encapsulates so well,

"Jill Sommers did a great job with her testimony leaving no room for doubt that 1) the cases in which investment in foreign sovereign debt for customers’ own accounts are limited to the extent of their foreign exchange deposits (so a small minority of accounts) and 2) it is never allowable to transfer money out of the customer accounts to commingle with MF’s investments."

Here is Jill Sommers testimony before the House today.

"When a broker-dealer is also a registered FCM, as MF Global was, there is one dually-registered entity and the entire entity gets placed into liquidation. Because there is one entity, it is not possible to initiate a SIPA liquidation of the broker-dealer, and a separate bankruptcy proceeding for the FCM. It is important to note, however, that when a dually-registered BD/FCM is placed into a SIPA liquidation proceeding, the relevant provisions and protections of the Bankruptcy Code, the Commodity Exchange Act (“CEA”), and the Commission’s regulations apply to customer commodity accounts just as they would if the entity were solely an FCM and in a non-SIPA bankruptcy proceeding.

An obvious point to make is that if a firm is involved in a bankruptcy proceeding, something must have gone very wrong. Bankruptcy proceedings can be very complicated and at times, messy. This can be magnified when the bankruptcy is among the largest in history and there are serious questions about the location of customer funds. The Commission is no stranger to FCM bankruptcies. Lehman Brothers and Refco are the two most recent FCM bankruptcies. While the Lehman Brothers bankruptcy was monumental in scale, and the Refco bankruptcy involved serious fraud at the parent company, commodity customers did not lose their money at either firm. In both instances, commodity customer accounts were wholly intact, that is, they contained all open positions and all associated segregated collateral. That being the case, customer accounts were promptly transferred to healthy FCMs, with the commodity customers having no further involvement in the bankruptcy proceeding. Unfortunately that is not what happened at MF Global because customer accounts were not intact.

In FCM bankruptcies, commodity customers have, pursuant to Section 766(h) of the Bankruptcy Code, priority in customer property. This includes, without limitation, segregated property, property that was illegally removed from segregation and is still within the debtor’s estate, and property that was illegally removed from segregation and is no longer within in the debtor’s estate, but is clawed-back into the debtor’s estate by the Trustee. If the customer property as I just described is insufficient to satisfy in full all the claims of customers, Part 190 of the Commission’s regulations allow other property of the debtor’s estate to be classified as customer property to make up any shortfall. A parent or affiliated entity, however, generally would not be a “debtor” unless customer funds could be traced to that entity.

Within the first weeks of the MF Global bankruptcy, the Trustee for the BD/FCM had, with the encouragement and assistance of the CFTC, transferred nearly all positions of customers trading on U.S. commodity futures markets, and transferred approximately $2 billion of customer property. On November 29th, the Trustee moved to transfer an additional $2.1 billion back to customers, to be used to “top up” all commodity customers to at least two-thirds of their account values as reflected on the books and records of MF Global, Inc. The Bankruptcy Court will hear the motion on December 9th. If the Court grants the motion we expect the transfer may be complete in two to four weeks, given the Trustee’s estimate of the timeframe within which he can complete the administrative functions necessary to effectuate the transfer. These transfers demonstrate that commodity customers are indeed receiving the highest priority in claims to customer property. We understand that more must be done...

While an FCM is permitted to invest customer funds, it is important to note that if an FCM does so, the value of the customer segregated account must remain intact at all times. In other words, when an FCM invests customer funds, that actual investment, or collateral equal in value to the investment, must remain in the customer segregated account at all times. If customer funds are transferred out of the segregated account to be invested by the FCM, the FCM must make a simultaneous transfer of assets into the segregated account. An FCM cannot take money out of a segregated account, invest it, and then return the money to the segregated account at some later time."

I expect that at some point the CFTC will file civil charges and will settle.

What the Obama Justice Department does about any criminal charges will be a significant indication of its character. I think the character of the opposition party is abundantly clear.

I believe that the US based customers will be made whole. I cannot speak for any customers who may have been served by MF's overseas subsidiaries, particularly the UK. I just do not know enough about jurisdictions and the scope of the bankruptcy in the US court.

But I think I can spot disinformation, propaganda, bold injustice, and brazen theft when I see it, given enough time and effort.

Corzine To Take the 'CEO Defense' - The Re-Hypothecation Scheme - Customers Have Priority

"I will be as harsh as truth, and as uncompromising as justice. On this subject, I do not wish to think, or speak, or write, with moderation. Tell a man whose house is on fire, to give a moderate alarm; tell him to moderately rescue his wife from the hand of the ravisher; tell the mother to gradually extricate her babe from the fire into which it has fallen; but urge me not to use moderation in a cause like the present. I am in earnest - I will not equivocate - I will not excuse - I will not retreat a single inch - and I will be heard."

William Lloyd Garrison

Yes I was highly paid.

Yes I signed a statement saying I had reviewed all the financials in keeping with my fiduciary responsibilities.

Yes I am a former Chairman of the investment bank Goldman Sachs and understand the financial industry intimately.

But...

I Know Nothing!

Jon Corzine's Opening Statement

And I am sorry something happened that I did not know about.

"Recognizing the enormous impact on many peoples’ lives resulting from the events surrounding the MF Global bankruptcy, I appear at today’s hearing with great sadness. My sadness, of course, pales in comparison to the losses and hardships that customers, employees and investors have suffered as a result of MF Global’s bankruptcy. Their plight weighs on my mind every day – every hour. And, as the chief executive officer of MF Global at the time of its bankruptcy, I apologize to all those affected."

I am a former US Senator and am therefore untouchable.  So, after the Congressmen are done uselessly yelling at me for the benefit of their constituents, can I go home with my money?

Commingling of customer funds and accounts a sacred trust?  Hah! In the age of globalization, you just take your activity to a favorable jurisdiction and try to hide in the ambiguities of the law.

Look for the Senate Republicans to block the nominee for the Consumer Protection Agency today. They don't want Consumer Protection from the Banks. Better to leave it with the Fed, a private institution.

Read this: MF Global and the great Wall St re-hypothecation scandal

"With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).

Nor is lending confined to between banks. Intra-bank re-hypothecation is also possible as evidenced by filings from Wells Fargo. According to disclosures from Wachovia Preferred Funding Corp, its parent, Wells Fargo, acts as collateral custodian and has the right to re-hypothecate and use around $170 million of assets posted as collateral.

The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.

Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.

U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening."

I was slow to use this Thomson Reuters piece because some of the things it seems to suggest in the beginning do not quite ring true.  As Jill Sommers, the head investigator from the CFTC into MF Global made very clear yesterday,  and as Janet Tavakoli encapsulates so well, 

"Jill Sommers did a great job with her testimony leaving no room for doubt that 1) the cases in which investment in foreign sovereign debt for customers’ own accounts are limited to the extent of their foreign exchange deposits (so a small minority of accounts) and 2) it is never allowable to transfer money out of the customer accounts to commingle with MF’s investments."

And as Commissioner Sommers said in her testimony today,

"In FCM bankruptcies, commodity customers have, pursuant to Section 766(h) of the Bankruptcy Code, priority in customer property. This includes, without limitation, segregated property, property that was illegally removed from segregation and is still within the debtor’s estate, and property that was illegally removed from segregation and is no longer within in the debtor’s estate, but is clawed-back into the debtor’s estate by the Trustee. If the customer property as I just described is insufficient to satisfy in full all the claims of customers, Part 190 of the Commission’s regulations allow other property of the debtor’s estate to be classified as customer property to make up any shortfall. A parent or affiliated entity, however, generally would not be a “debtor” unless customer funds could be traced to that entity."

Perhaps this explains some of the legal maneuvering that was undertaken by the debtors, specifically JPM, and the rush to subordinate the customer claims.

So let's see where the truth of this falls out.  I suspect that the truth and justice will be thoroughly swallowed by the credibility trap.

Speaking of lack of credibility, Under Hank Paulson The Fix Was In - Crudele

As I said at the time, when firms turn in 'perfect trading records' you know that they are gaming the system somewhere, exploiting some advantage.

If you think that your Wall Street funds are safe, you are kidding yourself. If you think you are safe in bullion, but do not own it and know exactly where it is, you don't have it. You may own a claim to something, and will stand in line and take what you are given like the MF Global customers when your time comes.

What will it take for people to realize that what is happening to 'the other guy' will happen to them too?

Former SEC Chairman Harvey Pitt was just commenting that the rules do not matter if the people running the financial firms do not have basic character and integrity and honesty. Of course it does not work voluntarily. Self-regulation is a joke to sociopaths and psychopaths.

And, Harvey, it does matter that they are rarely prosecuted for their crimes, and agree to settlements hardly more than a slap on the wrist. Of course the law does not matter if it is not enforced. As a former SEC Chairman under the last Republican Administration in which the Treasury Secretary was leaking insider information on a regular basis you should know this, and most likely do.

Hey I know how to fix government corruption. Let's just get rid of the government! Then the stealing can really flourish.

Nothing can change while people remain complicit fools in their own destruction.

Gold Daily and Silver Weekly Charts - Flight to Safety Lifts Gold

Just about everything is coiling for a move.